UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
 

 
FORM 10-Q
 


 
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: March 31, 2017

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________
 
Commission File Number: 000-50302

SILVERSUN TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)

Delaware
16-1633636
(State or other jurisdiction of incorporation)
(IRS Employer Identification No.)

120 Eagle Rock Ave
East Hanover, NJ 07936
(Address of principal executive offices)

(973) 396-1720
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months, and (2) has been subject to such filing requirements for the past 90 days.   Yes x No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.  Yes     No  

Indicate by check mark whether the registrant is large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” accelerated filer” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
 
Large accelerated filer r
 
Accelerated filer r
 
 
 
Non-accelerated filer r
 
Smaller Reporting Company 
 
 
 
Emerging growth company  r
 
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes     No
 
As of May 12, 2017, there were 4,489,903 shares outstanding of the registrant’s common stock.  


SILVERSUN TECHNOLOGIES, INC.
 
TABLE OF CONTENTS
 
 
 
Page No.
PART I.    FINANCIAL INFORMATION
 
 
 
 
Item 1.
3
 
3
 
4
 
5
 
6
 
8
 
 
 
Item 2.
20
Item 3.
24
Item 4.
24
 
 
 
PART II.   OTHER INFORMATION
 
 
 
 
Item 1.
25
Item 1A.
25
Item 2.
25
Item 3.
25
Item 4.
25
Item 5.
25
Item 6.
25
 
 

 

 
PART I – FINANCIAL INFORMATION 
Item 1.  Financial Statements
 
SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
 (Unaudited) 
 
 
 
March 31,
2017
   
December 31,
2016
 
ASSETS
           
 
           
Current assets:
           
Cash and cash equivalents
 
$
1,360,929
   
$
1,621,049
 
Accounts receivable, net of allowance of $375,000
   
2,266,606
     
2,501,621
 
Unbilled services
   
707,017
     
463,563
 
Prepaid expenses and other current assets
   
335,088
     
331,094
 
 
               
Total current assets
   
4,669,640
     
4,917,327
 
 
               
Property and equipment, net
   
475,144
     
466,202
 
Intangible assets, net
   
2,444,932
     
2,431,111
 
Goodwill
   
401,000
     
401,000
 
Deferred tax assets
   
2,294,902
     
2,414,902
 
Deposits and other assets
   
42,240
     
28,887
 
 
               
Total assets
 
$
10,327,858
   
$
10,659,429
 
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
 
               
Current liabilities:
               
Bank line of credit
  $
-
    $
-
 
Accounts payable
 
 
1,526,630
   
 
1,822,071
 
Accrued expenses
   
684,968
     
823,591
 
Accrued interest
   
15,718
     
15,533
 
Income taxes payable
   
182,519
     
177,466
 
Contingent consideration – current portion
   
180,000
     
180,029
 
Long term debt - current portion
   
308,362
     
306,677
 
Capital lease obligations – current portion
   
87,532
     
94,714
 
Deferred revenue
   
1,757,198
     
1,690,147
 
 
               
Total current liabilities
   
4,742,927
     
5,110,228
 
 
               
Contingent consideration net of current portion
   
23,891
     
31,685
 
Long term debt net of current portion
   
408,747
     
486,473
 
Capital lease obligations net of current portion
   
40,701
     
60,127
 
                 
Total liabilities
   
5,216,266
     
5,688,513
 
 
               
Commitments and contingencies
   
-
     
-
 
 
               
Stockholders’ equity:
               
Preferred stock, $0.001 par value; authorized 1,000,000 shares
   
-
     
-
 
Series A Preferred Stock, $0.001 par value; authorized 2 shares 
No shares issued and outstanding
   
-
     
-
 
Series B Preferred Stock, $0.001 par value; authorized 1 share
No shares issued and outstanding
   
1
     
1
 
Common stock:
               
Par value $0.00001; authorized 75,000,000 shares
4,489,903 and 4,477,403  shares issued and outstanding
   
46
     
46
 
Additional paid-in capital
   
12,163,465
     
12,176,642
 
Accumulated deficit
   
(7,051,920
)
   
(7,205,773
)
                 
Total stockholders’ equity
   
5,111,592
     
4,970,916
 
 
               
Total liabilities and stockholders’ equity
 
$
10,327,858
   
$
10,659,429
 

See accompanying notes to condensed consolidated financial statements.
3


SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
 
 
Three Months Ended March 31,
 
 
 
2017
   
2016
 
Revenues:
           
Software product, net
 
$
906,905
   
$
860,442
 
Service, net
   
7,095,667
     
6,923,859
 
Total revenues, net
   
8,002,572
     
7,784,301
 
 
               
Cost of revenues:
               
Product
   
434,909
     
444,894
 
Service
   
4,180,614
     
4,408,378
 
Total cost of revenues
   
4,615,523
     
4,853,272
 
 
               
Gross profit
   
3,387,049
     
2,931,029
 
 
               
Selling, general and administrative expenses :
               
Selling and marketing expenses
   
1,146,656
     
1,084,879
 
General and administrative expenses
   
1,704,976
     
1,518,933
 
Share based compensation
   
76,389
     
11,952
 
Depreciation and amortization
   
170,836
     
170,894
 
Total selling, general and administrative expenses
   
3,098,857
     
2,786,658
 
 
               
     Income from operations
   
288,192
     
144,371
 
 
               
Other income (expense)
               
    Interest expense, net
   
(8,461
)
   
(19,246
)
    Other income
   
-
     
10,000
 
Total other income (expense)
   
(8,461
)
   
(9,246
)
 
               
Income before taxes
   
279,731
     
135,125
 
 
               
Provision for income taxes
   
125,878
     
60,848
 
 
               
Net income
 
$
153,853
   
$
74,277
 
 
               
Net income per common share – basic and fully diluted
 
$
0.03
   
$
0.02
 
Weighted average shares
               
     Basic
   
4,486,153
     
4,410,736
 
     Diluted
   
4,490,153
     
4,477,403
 
 
See accompanying notes to the condensed consolidated financial statements

4


SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2016 AND THREE MONTHS ENDED MARCH 31, 2017
 
 
 
Series A
Preferred Stock
   
Series B
Preferred Stock
   
Common Stock
Class A
   
Additional
Paid in
   
Accumulated
   
Total
Stockholders’
 
 
 
Shares
   
Amount
   
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
Deficit
   
Equity
 
Balance at January 1, 2016
   
-
   
$
-
     
-
   
$
-
     
4,410,736
   
$
45
   
$
12,198,448
   
$
(10,642,172
)
 
$
1,556,321
 
 
                                                                       
Issuance of preferred share
   
-
     
-
     
1
     
1
     
-
     
-
     
99
     
-
     
100
 
Convertible note conversion into common stock
   
-
     
-
     
-
     
-
     
66,667
     
1
     
199,999
     
-
     
200,000
 
Cash dividend
   
-
     
-
     
-
     
-
     
-
     
-
     
(264,699
)
   
-
     
(264,699
)
Share-Based Compensation
   
-
     
-
     
-
     
-
     
-
     
-
     
42,795
     
-
     
42,795
 
Net income
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
3,436,399
     
3,436,399
 
 
                                                                       
Balance at December 31, 2016
   
-
   
$
-
     
1
   
$
1
     
4,477,403
   
$
46
   
$
12,176,642
   
$
(7,205,773
)
 
$
4,970,916
 
 
                                                                       
Cash dividend
   
-
     
-
     
-
     
-
     
-
     
-
     
(89,566
)
   
-
     
(89,566
)
Issuance of common stock for services
   
-
     
-
     
-
     
-
     
12,500
     
-
     
47,500
     
-
     
47,500
 
Stock warrants in exchange for services
   
-
     
-
     
-
     
-
     
-
     
-
     
19,923
     
-
     
19,923
 
Share-Based Compensation
   
-
     
-
     
-
     
-
     
-
     
-
     
8,966
     
-
     
8,966
 
Net income
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
153,853
     
153,853
 
Balance at March 31, 2017
   
-
   
$
-
     
1
   
$
1
     
4,489,903
   
$
46
   
$
12,163,465
   
$
(7,051,920
)
 
$
5,111,592
 
 

The accompanying notes are an integral part of these consolidated financial statements. 
 
5


SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 
 
 
Three Months Ended
March 31,
 
 
 
2017
   
2016
 
Cash flows from operating activities:
           
Net income
 
$
153,853
   
$
74,277
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Deferred income taxes
   
120,000
     
9,500
 
Depreciation and amortization
   
55,986
     
57,807
 
Amortization of intangibles
   
114,850
     
113,086
 
Share-based compensation
   
8,966
     
11,952
 
Common stock for services
   
47,500
     
-
 
Warrants in exchange for services
   
19,923
     
-
 
 
               
Changes in assets and liabilities:
               
Accounts receivable
   
235,015
     
(99,562
)
Unbilled services
   
(243,454
)
   
62,860
 
Prepaid expenses and other current assets
   
(3,994
)
   
137,290
 
Deposits and other assets
   
(13,353
)
   
-
 
Accounts payable
   
(295,441
)
   
50,152
 
Accrued expenses
   
(138,623
)
   
(118,811
)
Income tax payable
   
5,053
     
51,348
 
Accrued interest
   
185
     
1,844
 
Deferred revenues
   
67,051
     
(282,936
)
 Net cash provided by operating activities
   
133,517
     
68,807
 
 
               
Cash flows from investing activities:
               
Purchase of property and equipment
   
(64,928
)
   
(149,231
)
Software development costs
   
(128,671
)
   
(42,503
)
Net cash used in investing activities
   
(193,599
)
   
(191,734
)
 
               
Cash flows from financing activities:
               
Payment of cash dividend
   
(89,566
)
   
(264,699
)
Payment of contingent consideration
   
(7,823
)
   
(33,257
)
Payment of long term debt
   
(76,041
)
   
(74,393
)
Payment of capital lease obligations
   
(26,608
)
   
(24,501
)
Net cash used in financing activities
   
(200,038
)
   
(396,850
)
 
               
Net decrease in cash and cash equivalents
   
(260,120
)
   
(519,777
)
 
               
Cash and cash equivalents – beginning of period
   
1,621,049
     
1,193,313
 
 
               
Cash and cash equivalents – end of period
 
$
1,360,929
   
$
673,536
 
 
               
Cash paid during period for:
               
Interest
 
$
8,276
   
$
17,402
 
Income taxes
 
$
825
   
$
40,849
 
 
See accompanying notes to the condensed consolidated financial statements.
6


 SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2017 AND 2016

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES

For the three months ended March 31, 2017:

None

For the three months ended March 31, 2016:

None
 
 
See accompanying notes to the condensed consolidated financial statements.
 
7


SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)

NOTE 1 – DESCRIPTION OF BUSINESS
 
SilverSun Technologies, Inc. (“SilverSun” or the “Company”) and wholly owned subsidiary SWK Technologies, Inc. (“SWK”) is a value added reseller and master developer for Sage Software’s Sage100/500 and ERP X3 financial and accounting software as well as the publisher of proprietary software solutions, including its own Electronic Data Interchange (EDI) software, “MAPADOC.”  The Company is also a managed network service provider, providing remote network monitoring services, business continuity, disaster recovery, data backup, and application hosting. The Company sells services and products to various industries including, but not limited to, manufacturers, wholesalers and distributors located throughout the United States. The Company is publicly traded and was quoted on the Over-the-Counter Market Place (“OTCQB”) under the symbol “SSNT” until April 18, 2017. Since April 19, 2017, the Company has been listed and is traded on the NASDAQ Capital Market under the symbol “SSNT”.
 
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation
 
In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position of SilverSun Technologies, Inc. as of March 31, 2017, the results of operations and cash flows for the three months ended March 31, 2017 and 2016.  These results are not necessarily indicative of the results to be expected for the full year.
 
The financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC) and consequently have been condensed and do not include all of the disclosures normally made in an Annual Report on Form 10-K.  The December 31, 2016 balance sheet included herein was derived from the audited consolidated financial statements included in the Company’s annual report on Form 10-K. Accordingly, the financial statements included herein should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed with the SEC on March 24, 2017.

During the three months ended March 31, 2017, there have been no material changes to the Company’s significant accounting policies than those previously disclosed in the Company’s Form 10-K for the year ended December 31, 2016.
 
Principals of Consolidation

The consolidated financial statements include the accounts of SilverSun and its subsidiary SWK, which is wholly owned. All significant intercompany transactions and balances have been eliminated in consolidation.
 

8


SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period.  Actual results could differ from those estimates.

Goodwill

Goodwill is the excess of acquisition cost of an acquired entity over the fair value of the identifiable net assets acquired.  Goodwill is not amortized, but tested for impairment annually or whenever indicators of impairment exist. These indicators may include a significant change in the business climate, legal factors, operating performance indicators, competition, sale or disposition of a significant portion of the business or other factors. No impairment losses were identified or recorded for the three months ended March 31, 2017 and 2016.
 
Definite Lived Intangible Assets and Long-lived Assets

The purchased intangible assets are recorded at fair value using an independent valuation at the date of acquisition and are amortized over the useful lives of the asset using the straight-line amortization method. 
 
The Company assesses potential impairment of its intangible assets and other long-lived assets when there is evidence that recent events or changes in circumstances have made recovery of an asset’s carrying value unlikely. Factors the Company considers important, which may cause impairment include, among others, significant changes in the manner of use of the acquired asset, negative industry or economic trends, and significant underperformance relative to historical or projected operating results. No impairment losses were identified or recorded for the three months ended March 31, 2017 and 2016.
 
Revenue Recognition

Revenue is recognized when products are shipped, or services are rendered, evidence of a contract exists, the price is fixed or reasonably determinable, and collectability is reasonably assured.

Product Revenue

Software product revenue is recognized when the product is shipped to the customer. The Company treats the software component and the professional services consulting component as two separate arrangements that represent separate units of accounting. The arrangement consideration is allocated to each unit of accounting based upon that unit’s proportion of the fair value.  In a situation where both components are present, software sales revenue is recognized when collectability is reasonably assured and the product is delivered and has stand-alone value based upon vendor specific objective evidence.

Service Revenue

Service revenue is comprised of primarily professional service consulting revenue, maintenance revenue and other ancillary services provided. Professional service revenue is recognized as service time is incurred.
 
With respect to maintenance services, upon the completion of one year from the date of sale, the Company offers customers an optional annual software maintenance and support agreement for subsequent periods not exceeding one year. Maintenance and support agreements are recorded as deferred revenue and recognized over the respective terms of the agreements, which typically range from three months to one year and are included in services revenue in the Consolidated Statements of Income.

Shipping and handling costs charged to customers are classified as revenue, and the shipping and handling costs incurred are included in cost of sales.
 
9


SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
Unbilled Services

The Company recognizes revenue on its professional services as those services are performed or certain obligations are met. Unbilled services represents the revenue recognized but not yet invoiced. 

Deferred Revenues
 
Deferred revenues consist of maintenance service, customer support services, including telephone support and deposits for future consulting services which will be earned as services are performed over the contractual or stated period, which generally ranges from three to twelve months.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. The Company maintains cash balances at financial institutions that are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to federally insured limits. At times balances may exceed FDIC insured limits. The Company has not experienced any losses in such accounts.
 
Concentrations
 
The Company maintains its cash and cash equivalents with various institutions, which exceed federally insured limits throughout the year.  At March 31, 2017 and December 31, 2016, the Company had cash on deposit of approximately $1,043,676 and $1,280,695 respectively in excess of the federally insured limits of $250,000.
 
As of March 31, 2017, no one customer represented more than 10% of the total accounts receivable and unbilled services.
 
For the three months ended March 31, 2017 and 2016, our top ten customers accounted for 22% ($1,781,773) and 22% ($1,748,878), respectively, of our total revenues.  The Company does not rely on any one specific customer for any significant portion of our revenue.
 
For the three months ended March 31, 2017 and 2016, purchases from one supplier through a “channel partner” agreement were approximately 23% and 22% of cost of revenues, respectively.  This channel partner agreement is for a one year term and automatically renews for an additional one year term on the anniversary of the agreements effective date.
 
For the three months ended March 31, 2017 and 2016, one supplier represented approximately 39% and 36% of total accounts payable respectively.
 
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of trade accounts receivable and cash and cash equivalents.  As of March 31, 2017, the Company believes it has no significant risk related to its concentration of accounts receivable.
 
Accounts Receivable

Accounts receivable consist primarily of invoices for maintenance and professional services. Full payment for software ordered by customers is due in advance of ordering from the software supplier. Payments for maintenance and support plan renewals are due before the beginning of the maintenance period. Terms under our professional service agreements are generally 50% due in advance and the balance on completion of the services.
 
The Company maintains an allowance for bad debt estimated by considering a number of factors, including the length of time the amounts are past due, the Company’s previous loss history and the customer’s current ability to pay its obligations.  

Property and Equipment

Property and equipment is stated at cost, net of accumulated depreciation.  Depreciation is computed using the straight-line method based upon the estimated useful lives of the assets, generally three to seven years.  Maintenance and repairs that do not materially add to the value of the equipment nor appreciably prolong its life are charged to expense as incurred.
 
10


 
SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss is included in the Consolidated Statements of Income.

Income Taxes

Deferred income taxes reflects the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, as well as net operating loss carryforwards. Deferred tax assets and liabilities are classified as current or non-current based on the classification of the related assets or liabilities for financial reporting, or according to the expected reversal dates of the specific temporary differences, if not related to an asset or liability for financial reporting. Valuation allowances are established against deferred tax assets if it is more likely than not that the assets will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates or laws is recognized in operations in the period that includes the enactment date.
 
The Company has federal net operating loss (“NOL”) carryforwards which are subject to limitations under Section 382 of the Internal Revenue Code.

The Company files income tax returns in the U.S. federal and state jurisdictions. Tax years 2014 to 2017 remain open to examination for both the U.S. federal and state jurisdictions.

There were no liabilities for uncertain tax positions at March 31, 2017 and December 31, 2016.

Fair Value Measurement
 
The accounting standards define fair value and establish a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use on unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is as follows:
 
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
 
Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.
 
Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs. 

The Company’s current financial assets and liabilities approximate fair value due to their short term nature and include cash, accounts receivable, accounts payable, and accrued liabilities.  The carrying value of longer term lease and debt obligations approximate fair value as their stated interest rates approximate the rates currently available. The Company’s goodwill and intangibles are measured on a non-recurring basis using Level 3 inputs, as discussed in Note 5.
 
Stock-Based Compensation

Compensation expense related to share-based transactions, including employee stock options, is measured and recognized in the financial statements based on a determination of the fair value. The grant date fair value is determined using the Black-Scholes-Merton (“Black-Scholes”) pricing model. For employee stock options, the Company recognizes expense over the requisite service period on a straight-line basis (generally the vesting period of the equity grant). The Company’s option pricing model requires the input of highly subjective assumptions, including the expected stock price volatility and expected term. Any changes in these highly subjective assumptions may significantly impact stock-based compensation expense.

11


SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recently Adopted Authoritative Pronouncements
 
In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classifications of Deferred Taxes, which requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by this amendment. The new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. Early adoption is permitted and the standard may be applied either retrospectively or on a prospective basis to all deferred tax assets and liabilities. During the first quarter of 2017, the Company adopted this ASU and the appropriate reclassifications were made.
 
In March 2016, the FASB issued ASU No. 2016-09, Stock Compensation (Topic 718), which includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements. The standard is effective for annual periods beginning after December 15, 2016. During the first quarter 2017, the Company adopted this ASU. The key effects of the adoption on the Company’s financial statements include that the Company will now recognize windfall tax benefits as deferred tax assets instead of tracking the windfall pool and  recording such benefits in equity. Additionally, the Company has elected to recognize forfeitures as they occur rather than estimating them at the time of grant.
 
Recent Authoritative Pronouncements
 
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires lessees to put most leases on their balance sheets by recognizing a lessee’s rights and obligations, while expenses will continue to be recognized in a similar manner to today’s legacy lease accounting guidance. This ASU could also significantly affect the financial ratios used for external reporting and other purposes, such as debt covenant compliance. This ASU will be effective for the Company on January 1, 2019, with early adoption permitted. The Company is currently in the process of assessing the impact of this ASU on our consolidated financial statements.
 
In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers: Identifying performance obligations and licensing, to reduce the cost and complexity of applying the guidance on identifying promised goods or services around identifying performance obligations and implementation guidance on determining whether an entity’s promise to grant a license provides a customer with either a right to use the entity’s intellectual property (which is satisfied at a point in time) or a right to access the entity’s intellectual property (which is satisfied over time). The ASU will be effective for the Company in the first quarter of 2018. Early adoption is permitted as of annual and interim reporting periods beginning after December 15, 2016. The Company is evaluating the future impact of this ASU on the consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350), which includes provisions, intended to simplify the test for goodwill impairment. The standard is effective for annual periods beginning after December 15, 2019, with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We do not expect the adoption of this standard to have a significant impact on our financial position and results of operations.

No other recently issued accounting pronouncements had or are expected to have a material impact on the Company’s consolidated financial statements.

NOTE 3 – NET INCOME PER COMMON SHARE
 
The Company’s basic income per common share is based on net income for the relevant period, divided by the weighted average number of common shares outstanding during the period.  Diluted income per common share is based on net income, divided by the weighted average number of common shares outstanding during the period, including common share equivalents, such as outstanding option and warrants to the extent they are dilutive. The computation of diluted income per share for the three months ended March 31, 2017 and March 31, 2016 does not include share equivalents as all warrants and options exceeded the average market price of the common stock. Convertible debt is included below, based on if-converted method for the three months ended March 31, 2016. The debt was converted on December 9, 2016.
                              
 
 
Three Months
Ended
   
Three Months
Ended
 
 
 
March 31, 2017
   
March 31, 2016
 
Basic net income per share computation:
           
Net income
 
$
153,853
   
$
74,277
 
Weighted-average common shares outstanding
   
4,486,153
     
4,410,736
 
Basic net income per share
 
$
0.03
   
$
0.02
 
Diluted net income per share computation:
               
Net income
 
$
153,853
   
$
74,277
 
Weighted-average common shares outstanding
   
4,490,153
     
4,477,403
 
Total adjusted weighted-average shares
   
4,490,153
     
4,477,403
 
Diluted net income per share
 
$
0.03
   
$
0.02
 
 
12


SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 
NOTE 3 – NET INCOME PER COMMON SHARE (Continued)
 
The following table summarizes securities that, if exercised, would have an anti-dilutive effect on earnings per share.
 
 
 
Three Months
March 31, 2017
 
 
Three Months
March 31, 2016
 
Stock options
 
 
133,576
 
 
 
183,576
 
Warrants
 
 
208,240
 
 
 
203,253
 
 
 
 
 
 
 
 
 
 
Total potential dilutive securities not included in income per share
 
 
341,816
 
 
 
386,829
 
 
NOTE 4 – PROPERTY AND EQUIPMENT

Property and equipment is summarized as follows:
 
 
 
March 31, 2017
   
December 31, 2016
 
Leasehold improvements
 
$
56,429
   
$
30,557
 
Equipment, furniture and fixtures
   
1,783,494
     
1,744,439
 
 
   
1,839,923
     
1,774,996
 
Less: Accumulated depreciation
   
(1,364,779
)
   
(1,308,794
)
 
               
 Property and equipment, net
 
$
475,144
   
$
466,202
 
 
Depreciation and amortization expense related to these assets for the three months ended March 31, 2017 and 2016 was $55,986 and $57,807, respectively. 

Property and equipment under capital leases are summarized as follows:

 
 
March 31, 2017
   
December 31, 2016
 
Equipment, furniture and fixtures
   
521,905
     
521,905
 
Less: Accumulated depreciation
   
(360,102
)
   
(335,672
)
 
               
 Property and equipment, net
 
$
161,803
   
$
186,233
 

NOTE 5 – INTANGIBLE ASSETS

Intangible assets consist of proprietary developed software, intellectual property, customer lists and acquired contracts carried at cost less accumulated amortization and customer lists acquired at fair value less accumulated amortization. Amortization is computed using the straight-line method over the estimated useful lives.
 
The components of intangible assets are as follows:
 
 
 
March 31, 2017
   
December 31, 2016
   
Estimated Useful Lives
 
Proprietary developed software
 
$
806,500
   
$
677,829
     
5
 
Intellectual property, customer list, and acquired contracts
   
3,069,551
     
3,069,551
     
5 - 15
 
Total intangible assets
 
$
3,876,051
   
$
3,747,380
         
Less: accumulated amortization
   
(1,431,119
)
   
(1,316,269
)
       
 
 
$
2,444,932
   
$
2,431,111
         
 
Amortization expense included in depreciation and amortization was $114,850 for the three months ended March 31, 2017 as compared to $113,086 for the three months ended March 31, 2016. Included in proprietary developed software is $406,827 for the three months ended March 31, 2017 and $42,503 for the three months ended March 31. 2016 not yet in service. The Company expects the proprietary developed software to be placed in service in 2018, and has included the amortization in the future amortization schedule accordingly. 
13


SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)

NOTE 5 – INTANGIBLE ASSETS (Continued)

The Company expects future amortization expense to be the following:
  
 
 
Amortization
 
Balance of 2017
 
$
242,005
 
2018
   
317,555
 
2019
   
317,555
 
2020
   
299,565
 
2021
   
263,015
 
thereafter
   
1,005,237
 
 
       
Total
 
$
2,444,932
 
 
NOTE 6 – LINE OF CREDIT AND LONG-TERM DEBT

On July 21, 2016, SWK entered into a Revolving Demand Note (the “Revolving Demand Note”) by and between SWK and M&T Bank (“Lender”), a commercial lender. The Lender has agreed to loan SWK up to a principal amount of one million dollars. The interest rate on the Revolving Demand Note is a variable rate, equal to the “Prime Rate”, plus ninety-five one-hundredths percent (0.95%) per annum.  There is a minimum interest rate floor of four percent (4%). The Revolving Demand Note is secured by all SWK’s assets pursuant to a Security Agreement.  Furthermore, on July 21, 2016, the Company and Mr. Mark Meller, individually, entered into Unlimited Guaranty agreements (the “Guaranty Agreements”) with the Lender. The line is also collateralized by substantially all of the assets of the Company.   Under the Guaranty Agreements, the Company and Mr. Meller personally, jointly and severally guaranteed the liabilities of SWK due and owing under the terms of the Revolving Demand Note. At March 31, 2017 and December 31, 2016 there were no borrowings under this note.

On May 6, 2014, SWK acquired certain assets of ESC, Inc. pursuant to an Asset Purchase Agreement for a promissory note in the aggregate principal amount of $350,000 (the “ESC Note”). The ESC Note matures on April 1, 2019. Monthly payments are $6,135 including interest at 2% per year. At March 31, 2017 the outstanding balance was $155,969. 
 
On March 11, 2015, SWK acquired certain assets of 2000 SOFT, Inc. d/b/a Accounting Technology Resource (ATR) pursuant to an Asset Purchase Agreement for cash of $80,000 and a promissory note for $175,000 (the “ATR Note”). The ATR Note matures on February 1, 2018.  Monthly payments are $5,012 including interest at 2% per year. At March 31, 2017 the outstanding balance was $59,503.
 
On July 6, 2015, SWK acquired certain assets of ProductiveTech Inc. (PTI) pursuant to an Asset Purchase Agreement for cash of $500,000 and a promissory note for $600,000 (the “PTI Note”).  The PTI Note is due in 60 months from the closing date and bears interest at a rate of two and one half (2.5%) percent.  Monthly payments including interest are $10,645. At March 31, 2017 the outstanding balance was $408,141.
 
On October 19, 2015, SWK acquired certain assets of Oates & Company, LLC (Oates) pursuant to an Asset Purchase Agreement for cash of $125,000 and a promissory note for $175,000 (the “Oates Note”).  The Oates Note is due in three years from the closing date and bears interest at a rate of two (2%) percent.  Monthly payments including interest are $5,012. At March 31, 2017 the outstanding balance was $93,496. 

14


SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)

NOTE 6 – LINE OF CREDIT AND LONG-TERM DEBT (Continued)

At March 31, 2017, future payments of long term debt are as follows:
 
Remainder of 2017
 
$
230,636
 
2018
   
257,846
 
2019
   
154,727
 
2020
   
73,900
 
Total
 
$
717,109
 

NOTE 7 – CAPITAL LEASE OBLIGATIONS
 
The Company has entered into lease commitments for equipment that meet the requirements for capitalization. The equipment has been capitalized and is included in the accompanying consolidated balance sheets.  The related obligations are based upon the present value of the future minimum lease payments with interest rates ranging from 7.1% to 10.4%.
 
At March 31, 2017, future payments under capital leases are as follows:
 
Remainder of 2017
 
$
73,815
 
2018
   
60,631
 
2019
   
1,785
 
Total minimum lease payments
   
136,231
 
Less amounts representing interest
   
(7,998
)
Present value of net minimum lease payments
   
128,233
 
Less current portion
   
(87,532
)
Long-term capital lease obligation
 
$
40,701
 
 
NOTE 8 – EQUITY

Equity

On January 11, 2016, the Company announced the payment of a $0.06 special cash dividend per share of Common Stock. The dividend payments were paid out on January 20, 2016 for an aggregate amount of $264,699, which reduced additional paid in capital.

On July 28, 2016 (the “Effective Date”), the Company entered into a Series B Preferred Stock Purchase Agreement (the “Preferred Stock Purchase Agreement”) with the Company’s Chief Executive Officer, Mr. Mark Meller, pursuant to which Mr. Meller was issued the only share of the Company’s authorized but unissued Series B Preferred Stock.  Mr. Meller was issued one (1) share of Series B Preferred Stock for (i) $100 in cash and (ii) as partial consideration for Mr. Meller’s personal guarantee of the Revolving Demand Note. Each one (1) share of the Series B Preferred Stock shall have voting rights equal to (x) the total issued and outstanding Common Stock eligible to vote at the time of the respective vote divided by (y) forty-nine one-hundredths (0.49) minus (z) the total issued and outstanding Common Stock eligible to vote at the time of the respective vote.  For the avoidance of doubt, if the total issued and outstanding Common Stock eligible to vote at the time of the respective vote is 5,000,000, the voting rights of the Series B Preferred Stock shall be equal to 5,204,082 (e.g. (5,000,000 / 0.49) – 5,000,000 = 5,204,082). The Series B Preferred Stock has the rights, privileges, preferences and restrictions set for in the Certificate of Designation (the “Certificate of Designation”) filed by the Corporation with the Secretary of State of the State of Delaware (“Delaware Secretary of State”) on September 23, 2011.

On January 23, 2017, the Company announced the payment of a $0.02 special cash dividend per share of Common Stock. The dividend payments were paid out on January 31, 2017 for an aggregate amount of $89,566, which reduced additional paid in capital.

On January 27, 2017, the Company issued 100 shares of stock each to 125 non-executive employees of SWK.
15


SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)

NOTE 8 – EQUITY (Continued)

Options
 
A summary of the status of the Company’s stock option plans for the fiscal years ended December 31, 2016 and the three months ending March 31, 2017 and changes during the years are presented below (in number of options):
 
 
 
Number
of Options
   
Average
Exercise Price
 
Average Remaining
Contractual Term
   
Aggregate
Intrinsic Value
 
 
                     
Outstanding options at January 1, 2016
   
183,576
   
$
4.49
 
2.7 years
   
$
-0-
 
Options granted
   
-
     
-
     
-
         
Options canceled/forfeited
   
(40,000
)
 
$
4.50
                 
 
                               
Outstanding options at December 31, 2016
   
143,576
   
$
4.33
 
1.6 years
   
$
-0-
 
Options granted
   
-
                         
Options exercised
   
-
                         
Options canceled/forfeited
   
-
                         
 
                               
Outstanding options at March 31, 2017
   
143,576
     
4.33
 
1.3 years
   
$
-0-
 
 
                               
Vested Options:
                               
   March 31, 2017;
   
105,575
   
$
4.46
 
0.7 years
   
$
-0-
 
   December 31, 2016:
   
103,575
   
$
4.47
 
1.0 years
   
$
-0-
 
 
As of March 31, 2017 the unamortized compensation expense for stock options was $103,295.  Unamortized compensation expense is expected to be recognized over a weighted-average period of three years.

Warrants

On March 27, 2017, the Company granted 4,988 warrants with a fair value of approximately $19,923, which immediately vested, to John Schachtel as part of his compensation for agreeing to join the Board of Directors. The estimated fair value of the warrant has been calculated based on a Black-Scholes pricing model using the following assumptions: a) fair market value of stock of $4.00; b) exercise price of $4.01; c) Dividend yield of 0%; d) Risk free interest rate of 1.42%; e) expected volatility of 284.28%; f) Expected life of 5 years.
 
The following table summarizes the warrants transactions:
 
 
 
Warrants
Outstanding
   
Weighted Average
Exercise Price
 
 
           
Balance, January 1, 2016
   
203,253
   
$
5.29
 
Granted
   
-
   
$
-
 
Exercised
   
-
   
$
-
 
Canceled
   
-
   
$
-
 
Outstanding and Exercisable December 31, 2016
   
203,253
   
$
5.29
 
 
               
Granted
   
4,988
   
$
4.01
 
Exercised
   
-
   
$
-
 
Canceled
   
-
   
$
-
 
Outstanding and Exercisable March 31, 2017
   
208,240
   
$
5.26
 

16


 SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 
NOTE 9 – INCOME TAXES
 
The recognized deferred tax asset is based upon the expected utilization of its benefit from future taxable income. The Company has federal net operating loss (“NOL”) carryforwards of approximately $6,296,000 as of March 31, 2017, which is subject to limitations under Section 382 of the Internal Revenue Code. These carryforward losses are available to offset future taxable income, and begin to expire in the year 2026 to 2034.  
 
The foregoing amounts are management’s estimates and the actual results could differ from those estimates. Future profitability in this competitive industry depends on continually obtaining and fulfilling new profitable sales agreements and modifying products.  The inability to obtain new profitable contracts could reduce estimates of future profitability, which could affect the Company’s ability to realize the deferred tax assets.
 
Income tax provision:
 
 
 
Three Months Ended
 
 
 
March 31,
   
March 31,
 
 
 
2017
   
2016
 
Current:
           
               Federal
 
$
5,290
   
$
45,943
 
               State and local
   
588
     
5,405
 
 
               
               Total current tax provision
   
5,878
     
51,348
 
 
               
Deferred:
               
               Federal
   
108,000
     
8,550
 
               State and local
   
12,000
     
950
 
 
               
               Total deferred tax provision
   
120,000
     
9,500
 
 
               
Total provision
 
$
125,878
     
60,848
 

For the three months ended March 31, 2017, the Company’s Federal and State provision requirements were calculated based on the estimated tax rate. The Federal effective rate is higher than the statutory rate primarily due to Incentive Stock Options (ISO) expense and 50% of general meals and entertainment which are not deductible. The provision for the three months ended March 31, 2017 was $125,878. The effective tax rate consists primarily of the 40% federal statutory tax rate and a blended 5% state and local tax rate.

NOTE 10 – RELATED PARTY TRANSACTIONS
 
The Company leases its North Syracuse office space from its current CFO, Crandall Melvin III which expires on May 31, 2018. The monthly rent for this office space is $2,100. Total rent expense for the three months ended March 31, 2017 and 2016 was $6,300 and $6,300 respectively under this lease.
 
The Company leases its Seattle office space from Mary Abdian, an employee of SWK, which expires September 30, 2018. The monthly rent for this office space is $3,090 and increases 3% each year. Total rent expense for the three months ended March 31, 2017 and 2016  pursuant to this lease was $9,270 and $9,000 respectively.
 
As of March 31, 2017, long term debt and contingent consideration are considered related party liabilities as holders are current employees of the company, see Note 6.
 
17

SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 
NOTE 11 – COMMITMENTS

Operating Leases
 
Our main office was located at 5 Regent Street, Livingston, NJ 07039 where we had 6,986 square feet of office space at a monthly rent of $7,400. The lease expired on December 31, 2016 and was subsequently extended for two months ending February 28, 2017. On March 1, 2017, the Company entered into a new operating lease agreement for its main office located at 120 Eagle Rock Avenue, East Hanover, NJ 07936. The main office premises will consist of 5,129 square feet of office space at a monthly rent starting at $8,762 and escalating to $10,044 per month by the end of the term April 30, 2024.

The Company has a lease, with a one-year extension, for office space at 6834 Buckley Road, North Syracuse, New York, at a monthly rent of $2,100.  The lease expired on May 31, 2015 and was subsequently extended for a three year term commencing June 1, 2015 and ending May 31, 2018. 

The Company leases 2,700 square feet of office space in Skokie, Illinois with a monthly rent of $3,000. This lease expires April 30, 2018.

The Company leases 702 square feet of office space in Minneapolis, MN with a monthly rent of $1,560 a month. This lease expires March 31, 2018.

The Company leases 2,105 square feet of office space in Phoenix, AZ starting at $1,271 and escalating to $2,894 per month by the end of the term September 30, 2019.

The Company leases 1,500 square feet of office space in Seattle, WA with a monthly rent of $3,000 a month.  The lease expires September 30, 2018.

The Company leased 3,422 square feet of office space in Greensboro, NC with a monthly rent of $4,182 a month. The lease expired February 28, 2017 and was extended after reducing the rental space to 2,267 square feet at a monthly rent of $2,765 per month. The extension expires February 28, 2020.

The Company leases 1,745 square feet of office space in Santa Ana, CA with a monthly rent of $3,225 per month escalating to $3,402 per month by the end of the lease term, April 30, 2018.

On January 12, 2017, the Company entered into an operating lease agreement for its south New Jersey office commencing March 1, 2017. The company leases 6,115 square feet of office space in Thorofare, NJ starting at $4,591 and escalating to $5,168 per month by the end of the term February 28, 2022.
 
Total rent expense under these operating leases for the three months ended March 31, 2017 and 2016 was $111,241 and $87,379, respectively.

The following is a schedule of approximate future minimum rental payments for operating leases subsequent to the year ended December 31, 2016.
 
Remainder 2017
 
$
276,292
 
2018
   
297,326
 
2019
   
228,671
 
2020
   
177,763
 
2021
   
176,288
 
thereafter
   
287,301
 
 
 
$
1,443,641
 
 
18

SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 
NOTE 11 – COMMITMENTS (Continued)
 
Contingent Consideration

On October 1, 2015, SWK entered into an Asset Purchase Agreement (the “Macabe Purchase Agreement”) with The Macabe Associates, Inc., (“Macabe”), a Washington corporation and Mary Abdian and John Nicholson in their individual capacity as Shareholders. SWK acquired certain assets and liabilities of Macabe (as defined in the Macabe Purchase Agreement). In consideration for the acquired assets, the Company paid $21,423 in cash. Additionally, the Company will pay 35% of the net margin on software maintenance renewals for former Macabe customers for the first twelve months, and then 30%, 25% and 20% of the net margin on software maintenance renewals for the following three years. The Company will also pay 50% the first year, and 40%, 30% and 20% the three years after on the net margin on EASY Solution Maintenance, new software & license to existing Macabe customers and EASY Solutions software and maintenance sales to new customers. On any former Macabe customers migrating to Netsuite, X3 or Acumatica, the Company will pay 50% of the net margin of the sale after applicable costs and commissions for the three years period after the acquisition. The Company estimated this contingent consideration to be approximately $417,971 at acquisition. Certain payments were made in each of these contingent consideration components, resulting in a remaining balance of $203,891 as of March 31, 2017. The Company estimates that the contingent consideration will be fully paid by June 30, 2020.

NOTE 12 – SUBSEQUENT EVENTS

On April 24, 2017, the Company announced the payment of a $0.02 special cash dividend per share of Common Stock.  The amount of Common Stock outstanding on April 24, 2017 was 4,489,903. The dividend payments announced in April will be paid out on May 10, 2017 for an aggregate amount of $89,816, which will be applied against additional paid in capital.
 
19


Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations,
 
This quarterly report on Form 10-Q and other reports filed by SilverSun Technologies, Inc. and its wholly owned subsidiary SWK Technologies, Inc. (the “Company”) from time to time with the U.S. Securities and Exchange Commission (the “SEC”) contain or may contain forward-looking statements and information that are based upon beliefs of, and information currently available to, the Company’s management as well as estimates and assumptions made by Company’s management.  Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof.  When used in the filings, the words “anticipate,” “believe,” “estimate,” “expect,” “future,” “intend,” “plan,” or the negative of these terms and similar expressions as they relate to the Company or the Company’s management identify forward-looking statements.  Such statements reflect the current view of the Company with respect to future events and are subject to risks, uncertainties, assumptions, and other factors, including the risks contained in the “Risk Factors” section of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, relating to the Company’s industry, the Company’s operations and results of operations, and any businesses that the Company may acquire.  Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended, or planned.
 
Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance, or achievements.  Except as required by applicable law, including the securities laws of the United States, the Company does not intend to update any of the forward-looking statements to conform these statements to actual results.
 
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made.  These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. Our financial statements would be affected to the extent there are material differences between these estimates and actual results. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result.  The following discussion should be read in conjunction with our consolidated financial statements and notes thereto appearing elsewhere in this report.

Overview

We are a business application, technology and consulting company providing strategies and solutions to meet our clients’ information, technology and business management needs. Our services and technologies enable customers to manage, protect and monetize their enterprise assets whether on-premise or in the “Cloud”. As a value added reseller of business application software, we offer solutions for accounting and business management, financial reporting, Enterprise Resource Planning (“ERP”), Warehouse Management Systems (“WMS”), Customer Relationship Management (“CRM”), and Business Intelligence (“BI”). Additionally, we have our own development staff building software solutions for Electronic Data Interchange (“EDI”), time and billing, and various ERP enhancements. Our value-added services focus on consulting and professional services, specialized programming, training, and technical support. We have a dedicated network services practice that provides managed services, hosting, business continuity, cloud, email and web services. Our customers are nationwide, with concentrations in the New York/New Jersey metropolitan area, Chicago, Dallas, Arizona, Southern California, North Carolina and Washington.

Our core business is divided into the following practice areas:
 
ERP (Enterprise Resource Management) and Accounting Software
 
We are a value-added reseller for a number of industry-leading ERP applications. We are a Sage Software Authorized Business Partner and Sage Certified Gold Development Partner. We believe we are among the largest Sage ERP X3 partners in North America, with a sales and implementation presence complemented by a scalable software development practice for customizations and enhancements. Due to the growing demand for true cloud-based ERP solutions, we have added two (2) industry leading applications to our ERP portfolio: (1) NetSuite ERP, among the world’s leading cloud ERP solutions; and (2) Acumatica, a browser-based ERP solution that can be offered on premise, in the public cloud, or in a private cloud. We develop and resell a variety of add-on solutions to all our ERP and accounting packages that help customize the installation to our customers’ needs and streamline their operations.
 
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Value-Added Services for ERP
 
We go beyond simply reselling software packages; we have a consulting and professional services organization that manages the process as we move from the sales stage into implementation, go live, and production. We work inside our customers’ organizations to ensure all software and Information Technology (“IT”) solutions are enhancing their business needs. A significant portion of our services revenue comes from continuing to work with existing customers as their business needs change, upgrading from one version of software to another, or providing additional software solutions to help them grow their revenue. We have a dedicated help desk team that fields hundreds of calls every week. Our custom programming department builds specialized software packages as well as “off the shelf” enhancements and time and billing software.
 
EDI (Electronic Data Interchange) Software and Services
 
EDI is the computer to computer exchange of standard business documents, such as purchase orders and invoices, in electronic format. A standard file format is established for each kind of document in order to facilitate the exchange of data across a variety of platforms and programs. We have a proprietary software solution, MAPADOC, which is fully integrated with the Sage ERPs. MAPADOC allows businesses to dramatically cut data entry time by eliminating duplicate entries and reduces costly errors with trading partners. MAPADOC is the only EDI solution that is built within the framework of the Sage ERPs, allowing customers to stay within one application to get their job done.
 
Network and Managed Services
 
We provide comprehensive network and managed services designed to eliminate the IT concerns of our customers. Businesses can focus on their core strengths rather than technology issues. We adapt our solutions for virtually any type of business, from large national and international product and service providers, to small businesses with local customers. Our business continuity services provide automatic on and off site backups, complete encryption, and automatic failure testing. We also provide email and web security, IT consulting, managed network, and emergency IT services. Our focus in the network and managed services practice is to focus on industry verticals in order to demonstrate our ability to better understand our customers’ needs.

Results of Operations for the Three Months Ended March 31, 2017 and 2016.
 
During the three months ended March 31, 2017 the Company continued to expand its customer base and growth trend which we believe will provide a basis for future growth.
 
1)
Revenues increased 2.8% from the same three month period in the prior year.
2)
Income from operations increased to $288,192 as compared to $144,371 for the same three month period in the prior year.
3)
Net income was $153,853 as compared to $74,277 for the same three month period in the prior year.
 
Revenues
 
Revenues for the three months ended March 31, 2017 increased $218,271 (2.8%) to $8,002,572 as compared to $7,784,301 for the three months ended March 31, 2016. Software sales increased by $46,463 to $906,905 for the three months ended March 31, 2017 from $860,442 for the same period in 2016 for an overall increase of 5.4%.  Service revenue increased by $171,808 to $7,095,667 for the three months ended March 31, 2017 from $6,923,859 for the same period in 2016 for an overall increase of 2.5%. This is attributed to an increase in project consulting services.

Gross Profit
 
Gross profit for the three months ended March 31, 2017 increased $456,020 (15.6%) to $3,387,049 as compared to $2,931,029 for the three months ended March 31, 2016. For the period ended March 31, 2017, the overall gross profit percentage was 42.3% as compared to 37.7% for the period ended March 31, 2016.   The gross profit attributed to software sales increased $56,448 to $471,996 for the three months ending March 31, 2017 from $415,548 in the three months ending March 31, 2016.  The mix of products being sold by the Company changes from time to time which causes the overall gross margin percentage to vary. The gross profit attributed to services increased $399,572 for the three months ending March 31, 2017 from the three months ending March 31, 2016. The gross profit percentage attributed to services increased to 41.1% in 2017 from 36.3% in 2016.
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Operating Expenses
 
Selling and marketing expenses increased $61,777 (5.7%) to $1,146,656 for the three months ended March 31, 2017 compared to $1,084,879 for the three months ended March 31, 2016 due to increased sales personnel and travel expenses.
 
General and administrative expenses increased $186,043 (12.2%) to $1,704,976 for the three months ended March 31, 2017 as compared to $1,518,933 for the three months ended March 31, 2016 primarily as a result of increases in payroll and related expenses associated with the addition of management personnel.
 
During the three months ended March 31, 2017, the Company recognized $8,966 of share-based compensation expense as a result of the granting of stock options to some of its non-executive employees as compared to $11,952 for the same three month period in 2016.
 
Additionally during the three months ended March 31, 2017, the Company recognized $47,500 of expense related to the issuance of 100 shares of common stock to 125 non-executive employees. Additionally during the three months ended March 31, 2017, the Company recognized $19,923 of expense related to the issuance of warrants as partial compensation for an individual to join the Board of Directors.

Income from Operations

For the three months ended March 31, 2017, the Company had income from operations of $288,192 as compared to income from operations of $144,371 for the same period in 2016.

Income Taxes
 
For the three months ended March 31, 2017, the Company’s Federal and State provision requirements were calculated based on the estimated tax rate. The Federal effective rate is higher than the statutory rate primarily due to Incentive Stock Options (ISO) expense and 50% of general meals and entertainment expense which is not tax deductible. The provision for the three months ended March 31, 2017 was $125,878, and for the three months ended March 31, 2016 the provision was $60,848. The effective tax rate consists primarily of the 40% federal statutory tax rate and a blended 5% state and local tax rate.
 
Net Income
 
For the three months March 31, 2017, the Company had net income of $153,853 as compared to a net income of $74,277 for the three months ended March 31, 2016 for the reasons mentioned above.  
 
Liquidity and Capital Resources
 
We are currently seeking additional operating income opportunities through potential acquisitions or investments. Such acquisitions or investments may consume cash reserves or require additional cash or equity.  Our working capital and additional funding requirements will depend upon numerous factors, including: (i) strategic acquisitions or investments; (ii) an increase to current company personnel; (iii) the level of resources that we devote to sales and marketing capabilities; (iv) technological advances; and (v) the activities of competitors.
 
In addition to developing new products, obtaining new customers and increasing sales to existing customers, management plans to increase its business and profitability by entering into collaboration agreements, buying assets, and acquiring companies in the business software and information technology consulting and managed services market with solid revenue streams and established customer bases that generate positive cash flow.
 
On July 21, 2016, SWK entered into a Revolving Demand Note (the “Revolving Demand Note”) by and between SWK and M&T Bank (“Lender”), a commercial lender. The Lender has agreed to loan SWK up to a principal amount of one million dollars. The interest rate on the Revolving Demand Note shall be a variable rate, equal to the “Prime Rate”, plus ninety-five one-hundredths percent (0.95%) per annum.  There is a minimum interest rate floor of four percent (4%). The Revolving Demand Note is secured by all of SWK’s assets pursuant to a Security Agreement.  Furthermore, on July 21, 2016, the Company and Mr. Mark Meller, individually, entered into Unlimited Guaranty agreements (the “Guaranty Agreements”) with the Lender. The line is also collateralized by substantially all of the assets of the Company.   Under the Guaranty Agreements, the Company and Mr. Meller personally, jointly and severally guaranteed the liabilities of SWK due and owing under the terms of the Revolving Demand Note. At March 31, 2017 and December 31, 2016 there were no borrowings under this note. 


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On May 6, 2014, SWK acquired certain assets of ESC, Inc. pursuant to an Asset Purchase Agreement for a promissory note in the aggregate principal amount of $350,000 (the “ESC Note”). The ESC Note matures on April 1, 2019. Monthly payments are $6,135 including interest at 2% per year and at March 31, 2017 the outstanding balance was $155,969. On March 11, 2015, SWK acquired certain assets of 2000 SOFT, Inc. d/b/a Accounting Technology Resource (ATR) pursuant to an Asset Purchase Agreement for cash of $80,000 and a promissory note in the aggregate amount of $175,000 (the “ATR Note”). The ATR Note matures on February 1, 2018.  Monthly payments are $5,012 including interest at 2% per year and at March 31, 2017 the outstanding balance was $59,503. On July 6, 2015, SWK acquired certain assets of ProductiveTech Inc. (PTI) pursuant to an Asset Purchase Agreement (the “PTI Purchase Agreement”) for cash of $500,000 and a promissory note for $600,000 (the “PTI Note”).  The PTI Note matures July 1, 2020.  Monthly payments are $10,645 including interest at 2.5% per year and at March 31, 2017 the outstanding balance was $408,141. On October 1, 2015 SWK entered into an Asset Purchase Agreement with The Macabe Associates, Inc., (“Macabe”), a Washington corporation and Mary Abdian and John Nicholson in their individual capacity as Shareholders (the “Macabe Purchase Agreement”). SWK acquired certain assets and liabilities of Macabe (as defined in the Macabe Purchase Agreement). In consideration for the acquired assets, the Company paid $21,423 in cash and additional consideration. The Company estimated this contingent consideration to be approximately $417,971 at acquisition and which is included in the purchase price. Certain payments were made in each of these contingent consideration components, resulting in a remaining balance of $203,891 as of March 31, 2017.

During the three months ended March 31, 2017, the Company had a net decrease in cash of $260,120.  The Company’s principal sources and uses of funds were as follows:
 
Cash provided by operating activities

The Company generated $133,517 in cash from operating activities for the three months ended March 31, 2017 as compared to generating $68,807 of cash for operating activities for the same period in 2016. This increase is due in large part to increased accounts receivable collection activities.
 
Cash used in investing activities

Investing activities for the three months ended March 31, 2017 used cash of $193,599 as compared to using cash of $191,734 for the same period in 2016. This use of cash is attributed to purchases of property and equipment and costs related to the internal development of software.

Cash used in financing activities
 
Financing activities for the three months ended March 31, 2017 used cash of $200,038 as compared to using cash of $396,850 for the same period in 2016. The decrease was due primarily to large payments of a cash dividends in the prior year compared to the current year, and greater payments for contingent consideration in the prior year.
 
The Company believes that as a result of the growth in business, and the availability of its Credit Line, it has adequate liquidity to fund its operating plans for at least the next twelve months.

There was no significant impact on the Company’s operations as a result of inflation for the three months ended March 31, 2017.  
 
Off Balance Sheet Arrangements
 
During the three months ended March 31, 2017 or for fiscal 2016, we did not engage in any material off-balance sheet activities or have any relationships or arrangements with unconsolidated entities established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Further, we have not guaranteed any obligations of unconsolidated entities nor do we have any commitment or intent to provide additional funding to any such entities.

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Item 3.  Quantitative and Qualitative Disclosures About Market Risk

We do not hold any derivative instruments and do not engage in any hedging activities.
 
Item 4.  Controls and Procedures
 
a) Evaluation of Disclosure and Control Procedures
 
An evaluation was performed under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, our principal executive officer and principal financial officer, respectively, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15 or 15d-15 under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are not effective due to the material weakness resulting from a lack of sufficient internal accounting resources resulting in a lack of segregation of duties to ensure adequate review of financial statement preparation, and (ii) ineffective management review of complex transactions to enable timely decisions regarding required disclosures. This deficiency is the result of our limited number of employees. This deficiency may affect management’s ability to determine if errors or inappropriate actions have taken place. Management is required to apply its judgment in evaluating the cost-benefit relationship of possible changes in our disclosure controls and procedures.
Management intends to strengthen the Company’s internal controls. Management expects to make progress towards reducing the risk that the material weaknesses could result in a material misstatement of the Company’s annual or interim financial statements. The Company intends to hire additional personnel to allow for improved financial reporting controls and segregation of duties as the Company’s operations and revenues have grown to the point of warranting such controls. The Company is pursuing an independent assessment of our internal controls to evaluate specific weaknesses and as business conditions allow and resources permit, management will systematically build the necessary capabilities and infrastructure to implement corrective action.
(b) Management’s Report on Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting during its most recently completed fiscal quarter that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting, as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act.
 

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PART II – OTHER INFORMATION

Item 1.     Legal Proceedings

We are not currently involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect on our financial condition.
 
Item 1A.  Risk Factors
 
We believe there are no changes that constitute material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016, filed with the SEC on March 24, 2017.
 
Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds
 
Other than disclosed above, there were no unregistered sales of equity securities that were not otherwise disclosed in a current report on Form 8-K.
 
Item 3.     Defaults upon Senior Securities
 
There has been no default in the payment of principal, interest, sinking or purchase fund installment, or any other material default, with respect to any indebtedness of the Company.
 
Item 4.     Mine Safety Disclosures

Not Applicable.
 
Item 5.     Other Information
 
There is no other information required to be disclosed under this item which has not been previously reported.

Item 6.     Exhibits
 
31.1
 
31.2
 
32.1
 
32.2
 
101.INS
 
XBRL Instance Document
101.SCH
 
XBRL Taxonomy Extension Schema
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase
101.LAB
 
XBRL Taxonomy Extension Label Linkbase
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase
 
* Filed herewith
 
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SIGNATURES
 
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
SILVERSUN TECHNOLOGIES, INC.
 
 
 
 
 
 
 
 
 
 
 
 
Dated: May 15, 2017
 
By:
/s/ Mark Meller
 
 
 
 
 
Mark Meller
 
 
 
 
 
Principal Executive Officer
 
 
 
 
 
 
 
 
 
 
By:
/s/ Crandall Melvin III
 
 
 
 
Crandall Melvin III
 
 
 
Principal Accounting Officer
 
 
 
 
 
 
 
 
 
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